Generally speaking, we live in a society where people value choice, and the general attitude is that more choice is better. That’s apparent when you walk down the bread aisle in the grocery store. Really? How many different ways can you package enriched wheat flour and high fructose corn syrup? Those commercials on TV advertising a particular phone service are funny. A guy sits around a table with a group of children and their responses are filmed after baiting them with questions like, “which is better – more or less?” Of course the kids scream out in unison that “more” is better. The problem is that despite our cultural biases, more is not always better.
This is very apparent in the number of investment options offered under a retirement plan. Studies have shown that too many choices for plan participants can be overwhelming and lead to analysis paralysis. In one often cited study, the University of Pennsylvania Wharton School Pension Research Council Working Paper 2003-10, it shows declining participation rates when there are more investment option choices, with a precipitous drop in participation rates when choices number thirty or more. With too many choices, the net result is that participants make poorer choices, or simply make no choice.
The 2013 403(b) Plan Survey by the Plan Sponsor Council of America (PSCA) shows some interesting statistics. On average, 403(b) plans offer far too many choices than is optimal: 27 on average for employer contributions and 31 on average for employee contributions. Higher education is a huge outlier, with 45 on average for employer contributions and 65 on average for employee contributions.
How can this be so far out of whack with the Wharton study’s demonstration of significant analysis paralysis? This is due to the historical evolution of the 403(b) market. 403(b) plans began as retail individual annuity arrangements, and each employee did their own thing. Even though legislative and regulatory changes over the years have made 403(b) plans run more and more like qualified plans, an individual attitude still exists. In fact even today there are groups calling for maintaining “choice” as a code-word phrase for continuing to let individuals do their own thing. Even though many individuals have individual brokers and advisors to work with, there has been a dearth of advisors looking at investment offerings as a whole at plan level, and how it translates to a responsible choice for participants.
ERISA has it right. There needs to be a responsible party to review the investment options and provide a prudent line-up for participants. Clearly, there are 403(b) plans that have not done this, especially among the institutions of higher education. They probably need help from the expertise of investment professionals to help overcome the demands for and cultural bias toward more choice in favor of a better designed plan that will provide better outcomes for participants overall.
Do you agree? Let’s chat in the comments.
In addition to blogging here, I also tweet regularly about topics of interest to Tax Exempt plans. Follow me on Twitter: @1aaronfriedman1.
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